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Until S&P 500 Bear Flag Is Resolved, Remain Neutral

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When the flag is resolved, investors will be able to determine the lean; for now, remain in a "preservation of capital" stance.

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To study the abnormal is the best way of understanding the normal.
-- William James

After the EU's decision to assist Spain and Italy in late June, it almost seemed, for a bit, that normalcy was returning to the markets. Like ants at a picnic, this soon became infested with the proliferation of Libor manipulation. Coincidentally, Spain and Italy seem to be the next culprits as arrest potential rises over the horizon. With continued news over scandals, the PIIGS interest rates again rise above the previously forecasted "unsustainable" levels. This, for all intents and purposes, drove the US market selloff on Friday.

The risk-on/risk-off oscillations of late have been greatly varied and much too often do not appropriately determine a conclusive side to be on when analyzing the market over a one-year time horizon. Hence, the need to be nimble and only lean to one side or the other instead of being black or white (bullish or bearish), has become critical for successful returns.

On a purely technical basis the S&P 500 Index (SPX) has been creating a large bear flag since early June. This flag has a triple converging resistance around 1,390 – 1,400 with an upward sloping support around 1,350 – very tight. Probabilities, because of the volume and stochastic (momentum) divergence, are indicating a break south. However, my firm's analysis suggests staying neutral, without lean, until this is resolved. When the flag is resolved investors will be able to determine the lean; for now, remain in a "preservation of capital" stance.


Click to enlarge

Regardless of the outcome, this past year has taught us to expect the unexpected and to not succumb to greed. If the market does return to a bullish stance there will be ample opportunity to make gains. Until then, know the battlefield, assess the landscape, and realize risk is plentiful. As we've said befor, wait until you see the whites of their eyes before you commit.

We hope helps and finds you well.

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
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No positions in stocks mentioned.

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